How investing in real estate is one of the best hedges against inflation
By: AZ Big Media
As a result of inflation’s persistence in the economy, the sticker shock for most essential resources we depend on such as electricity, food and gas make it more difficult for families across the country to afford, well, life.
The annual inflation rate accelerated to 8.54% this month, the highest since 1982. Inflation isn’t anything new and it’s bound to happen again and again. If history teaches us anything, it’s that investing in income producing real estate offers a strong hedge against inflation.
Real Estate Investments Benefits
If history is an indication, during periods of high and persistent inflation, cash sitting in low-yield savings, brokerage or other similar types of investment accounts, will likely be worth less over time than if you moved those funds into income producing real estate. Here’s why:
Appreciation. Property values keep pace with or sometimes even exceed the rate of inflation, especially in major metros like Phoenix.
Increasing Rent. Inflation makes everything more expensive, even rent. If you buy a single or multi-unit rental property today, locking in a low interest rate (relative to the expected impending interest rate hikes) with a fixed mortgage translates to more money in the long-run because you can charge more for rent in the future, thus creating financial gain in the future because you locked in today’s payment for the duration of your loan, while charging more in rent in the future. The same principles apply for cash buyers – lock in today’s purchase price, create monthly cash flow that increases over time, and capitalize on asset appreciation over time.
Scarcity. Nationwide, the basic laws of supply and demand are at play. There are not enough homes available for those who want them and residential new builds are not ramping up at a pace sufficient to balance the supply situation. In today’s climate, when you buy residential property, you are purchasing a scarce commodity. As a key economic concept, owning a good that is scarce puts you in a favorable financial position. Owning a good that is both scarce and necessary (like housing) puts you in an even better financial position.